Monday, August 26, 2002

A keynote of libertarian philosophy is the rationality of the market.
Here's an example of how that works in practice.

During the dotcom boom, a company called Liquid Audio had an IPO.
Even though it had no viable business model, the market thought it was
rational to buy the stock, and the IPO was a huge success, leaving the
company with a gigantic cash hoard.

After the dotcom boom came the dotcom bust, when the market thought
it was rational to sell dotcom stocks. And since Liquid Audio was
such a stock, its stock price cratered --- indeed, to the point that
the market is now valuing the company at less than the value of its
remaining cash on hand.

A few stockholders have noticed, and since the company still has no
viable business model, they are now trying to break
the company up and pocket the cash. Which may be the first
investment decision related to this company which has ever made sense.

Warren Buffett once famously commented that "Any player unaware of
the fool in the market probably is the fool in the market." How do
all those fools arrive in the market? American Enterprise Institute
resident scholar John Makin blames hype from, among
others, greedy brokers, fad-following journalists, foolish academics,
and the two AEI colleagues of his who wrote the now-infamous "Dow
36,000". Much of what Makin has to say is smart and well-taken,
though his opening complaint that stock funds put all their money in
(gasp!) stocks is just bizarre --- if you want a fund that invests in
bonds, and you probably do, buy a bond fund. But which of the
brokers, reporters, profs, and AEI drones were responsible for all the
professional venture capitalists who jump-started the Liquid Audios of
the world in the first place?